Background
Many articles have been published all around the world and the dispute between bulls and bears is still on. Below we offer our view on how to look on facts vs hype/hopes. Before we start allow us to acknowledge the only fact related to Tesla: Musk started an industrial revolution by convincing the public & competition that the time has come to shift from internal combustion engine (ICE) to alternatives (BEV, PHEV, FCEV). Previous attempts of others were not so successful. Only time will tell which technology wins.
Our case study
To keep it short, instead of analyzing TSLA as a single stock generating large share of revenue from automotive (for which none of the valuation metrics make sense) we will give it a try and look at the company as combination of many perspective businesses. Let’s imagine it will have
- product / brand name like Apple,
- growth rates of Amazon,
- customer stickiness & global footprint as Microsoft,
- diversified stream of revenues as Berkshire Hathaway and
be a little bit of “every other” company in the S&P 500 Mega Cap ranking (Mkt. Cap > $200bn).
We underline again, that we’re indifferent from which business area(s) [in tabs below] the stream of revenue / profits will come from. The idea is to use current valuations of selected companies (irrespective in which segment they operate in) and compare the results (Revenue, EBITDA and Margins) to TSLA.
Analyzing such sample (35 companies excl. Tesla), the following observations (using Simple Average) can be made:
- Mkt. Cap Avg.: $480bn
- Revenue: $108bn
- EBITDA: $25bn
- Gross Margin (TTM): 51.2%
- Net Margin (TTM): 19.3%
with Tesla being “priced” at ~ 74% premium vs such sample (Mkt. Cap of Tesla / Mkt. Cap Avg.) the company would need to have already now (not in future as many hope) following parameters:
- Mkt. Cap: $834bn
- Revenue: $188bn (7.6x higher than 2020 result)
- EBITDA: $44bn (11x higher)
- Gross Margin (TTM): 89% (4x higher)
- Net Margin (TTM): 34% (18x higher)
We reiterate that Tesla would need to have such profitability already now (and maintaining/improving it in line with the selected companies in the years to come) to justify it’s current valuation. Within the next 2 years, projections indicate they will barely break the $15bn EBITDA (in 2023 having CAGR ~ 30%) which would imply a Mkt. Cap of ~ $120bn or 1/7th of current valuation (in optimistic/bullish scenario). In tabs below we provide our opinion on each of Tesla’s pillars and indicate why we have a much more conservative view on future potential of Tesla.
Perhaps “the pillar of Tesla’s strategy” which creates biggest disputes among the bull & bear camps. The 4 models currently being produced match in terms of volume a small car company (with tight net margins). Bringing the production to volumes/margins of the “old automotive titans” will be a daunting tasks as both the
- production capacities (2 factories in production, 2 in development)
- model lineup & future demand
is highly questionable. Perhaps the most important fact we would like to highlight is the upcoming competition in EV / BEV space out of which we deem the following model line-ups
- Europe: Mercedes (EQ), BMW (i), Volkswagen (ID), Audi (e-tron), Volvo (Polestar)
- United States: Rivian, Lucid Air, Ford or GM
- China: Nio, BYD
as most valid manufacturers / showstoppers for Tesla dominance. A good indication of what for example a CN consumer might expect, was recent NIO day (9th of Jan 2021) during which the sedan NIO ET7 was revealed. It seems to be a superior car to Tesla’s Model S in every aspect (even in the most favorite category “range anxiety” where the highest priced “Model S plaid” can’t match the range of NIO ET7). In EU, Mercedes EQS (planned release 2021), BMW i4 (2021), i7 (2023) and many other models will enhance the choice for the consumer and potentially contribute to further weakness in Tesla’s sales figures. We also look forward to
- Rivian’s entry into Pickup/SUV segment which is the most profitable segment in US,
- new business concepts brought forward as a Designer & Manufacturer collaboration like Fisker&Magna / Byton&Foxconn and recently announced/rumored Apple&Hyundai.
Looks like the model line-up of Tesla: “S 3 X Y” no longer seems to be the only sexy thing in town.
Although some industry leaders agree that this technology can cut cost of operating taxis by ca. 50% one should not underestimate both the “user case” (addressing the demand problem for such a service) as well as competition, legal aspects and many other factors (incl. socioeconomic effects) .
As for the “user case”, having autonomous taxis without a driver and with interior cameras ON (recording the interior to protect the vehicle from e.g. damage caused during the ride) will both hit the barriers of privacy as well as e.g. GDPR (mainly in Europe). This might materially impact the adaptability of such technology.
Legal aspects for driverless cars are not addressed on any continent (US, Europe, Asia) rendering the adoption of such technology as mute, at least for the time-being. Even if such technology will be covered/addressed, any major incident can put it on ice or at least slow down the adoption rate (i.e. delaying any Cash Flow expectations by couple of years).
Apart from practical obstacles, the competition is heating up (Uber, Lyft, Google’s Waymo, GM Cruise, Argo AI, Alibaba’s AutoX) and together with pure Robo-taxi companies (e.g. Zoox (backed by Amazon)) we don’t see any scenario in which Tesla should become the industry leader.
The so called Full self-driving (FSD) capabilities raise similar questions in terms of legal framework as robo-taxis, albeit this setup at least offers a choice whom to make responsible: the car owner.
Apart from legal view, which is a very serious one, such technologies can be scaled up and enabled only in 5G operating networks where both the current adoption rate (due to technology concertation in CN hands (Huawei, ZTE)) as well as public enthusiasm re. 5G network make the business case of self-driving cars rather a topic of coming years/decades (again postponing any Cash Flow potential far into the future).
In addition, similar to car production, competition is heating up. Among the few ones we would like to highlight Google’s Waymo, NIO’s Autonomous Driving (NAD) coupled with LiDAR technology and GM’s Cruise.
With a bit of irony, we were also watching the 2020 last day’s offers in US for Model 3 with 3 months FSD “free subscription”. Let’s be honest, even if it would work flawlessly (we have big doubts) who wants to buy a new car and be chauffeured around by a computer for 3months? It takes all the fun & pleasure out of owning/buying a car.
This is perhaps the most complex pillar as a true innovation could unlock massive wealth and significantly improve consumer product durability by solving not only
- the charging time frustrations,
- range anxiety and safeness,
but also propel a much higher adoption rate (& not only in BEVs). Tesla’s dependency on battery production capacities of Phillips, CATL, LG Chem and potentially others does not imply that Tesla would have a certain edge in manufacturing. As for software related Battery Management Systems (BMS) the current edge which Tesla has is for Lithium-Ion batteries which (hopefully in near future) will be replaced by Solid State Batteries. This technology is at the moment out of scope for Tesla as the CEO decided to pursue 4680 battery pack route (announced during Battery Day). Until Tesla solves all practical questions associated with such battery format and builds its own factory, it will still need to rely on 3rd party manufacturers. Please keep this in mind when switching to the next pillar “Energy storage”.
In one of our next posts, we would also like to analyze the End-to-End life cycle of BEVs (incl. battery pack recycling costs / environmental impacts) and provide the reader an insight whether the proclaimed technology revolution really is so environmentally friendly as claimed. To our surprise we could not find many (actually any) scientific articles which would comprehensively cover this topic.
will be published soon…
will be published soon…
Conclusion
Despite TSLA being priced for perfection both in terms of Business case as well as execution we remain confident that the current stock price severely underestimates risks which lie ahead (in all aspects covered above). Unfortunately the speculative frenzy in options market (OTM calls convexity squeeze) is amplifying the price movements and is not supportive for our case study. However, once this kind of music stops playing, things will turn very quickly around. In addition, we’ve seen examples in the past where the 1st mover advantage actually didn’t end up well for such pioneers (Nokia, AOL, Kodak etc.). Only time will tell if Tesla falls within such sample or if it will be one of few exceptions.
Additional Information
Battery Electric Vehicles have a battery that is charged primarily by plugging it in to off-board sources of electricity*, produced from natural gas, coal, nuclear energy, wind energy, hydropower, and solar energy. EVs always operate in all-electric mode and have typical driving ranges from 240 to 500km (WLTP) and are classified (despite the sources of electricity used) as emission free.
Note: * According to the U.S. Energy Information Administration, renewable energy sources generated about 17% of the country’s electricity in 2019, the rest is fossil fuel based with share of nuclear (20%), coal (23%), gas (38%) and other (2%). When looking on China’s production (CN) the indicated share of renewables stands at 5%. According to Eurostat, EU’s primary energy production in 2018 is based on renewables (32%), nuclear (31%), solid fossil fuels (18%), natural gas (9%), oil and petroleum products (3.9%) and non-renewable wastes (2.1%).
Consumers should be aware that on average less than 25% of time they travel using a BEV is in reality “clean & environmentally friendly” when talking about emissions (depending on the region / country specific share of renewables).
Plug-in Hybrid Electric Vehicles are powered by an internal combustion engine and an electric motor that uses energy stored in a battery. PHEVs can operate in all-electric (or charge-depleting) mode. To enable operation in all-electric mode, PHEVs require a larger battery, which can be plugged in to an electric power source to charge. To support a driver’s typical daily travel needs, most PHEVs can travel between 32 and 64km on electricity alone, and then will operate solely on gasoline, similar to a conventional hybrid.
Fuel Cell Electric Vehicles are powered by hydrogen the most abundant element in the universe, making it virtually an infinite source of energy. They are more efficient than conventional internal combustion engine vehicles and produce no tailpipe emissions—they only emit water vapor and warm air. FCEVs and the hydrogen infrastructure to fuel them are in the early stages of implementation.